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India rising

13 Oct 2017

Parsys 2

With a rapidly growing middle class, a young labour force, and a reform-minded government, India is on the rise.

India’s economic outlook was relatively mediocre until as recently as 2013. In the past few years, we've seen a dramatic reversal. With a GDP of nearly $2.5 trillion, and one of the highest GDP growth rates in the world, India now holds investment-grade borrower status.

India’s GDP growth is outpacing EM peers

Source: IMF, Barclays Research forecasts out to 2022

Several major factors are at play in India’s economy, which are combining to create a virtuous cycle that portends sustainable growth. However, there are nuances to each of these factors, which we would summarise as follows:

Anti-corruption reforms

The government has attempted to reinforce India’s long-term growth potential, despite facing an entrenched bureacracy. For example, the 2016 move to ban high denomination 500 and 1,000 rupee banknotes represented a bold anti-corruption measure, though the macroeconomic implications of the move are still unfolding. The government has shown its commitment to introducing reforms and improving the effectiveness and efficiency of public services, despite considerable temporary disruption.

Another of its anti-corruption initiatives is the Aadhaar programme – the largest biometric identification system in the world. In response, over a billion Indians have enrolled in the universal ID programme, and more than 300 million new bank accounts have been opened in the past three years as a result of a recent financial inclusion programme.

Long-term investment

The government has avoided ‘quick fix’ economic solutions, focusing instead on shaping an economy that can continue to grow. In order to attract sustainable, long-term investments, limits on foreign direct investment (FDI) have been eased, regulations have been simplified, an integrated goods and services tax (GST) has been implemented, and a mapped out planned urbanisation is underway.

India is a top prospective host economy for FDI for 2017-2019

Note: Percentage of respondents selecting a country (each executive was asked to select the three most promising prospective host countries). Source: UNCTAD World Investment Report 2017 survey, Barclays Research

The introduction of a goods and services tax (GST) has the potential to create a common market and absorb much of the “grey” market into the formal economy, making it easier to do business in India. Improving the ease of doing business in general is also a key priority.

Import arbitrage

Much of India’s energy and raw commodities are imported. This has been a great boon for the country during the decline of the global commodity super cycle, as it is able to internalise the macroeconomic benefits of the secondary industry, while still protecting its own resources as they accrue additional demand and value.

Growing labour force

The average age of India's productive workforce is 27 – a decade younger than China's and America's workforce – and most people are expected to continue working until 2050, as opposed to only half of current workers in the US and China. Furthermore, India enjoys a growing population – more than 10 million people join India's productive labour force every year.

India’s population projected to remain one the youngest for the foreseeable future

Source: UN - World Population Prospects 2015 and 2017, Barclays Research

Strong macro fundamentals

India has managed to circumvent high inflation, high fiscal and current account deficits, and pressure on the currency and interest rates with careful monetary and fiscal policy. India’s current account gap, as a proportion of GDP, has narrowed rapidly over the last four years. Its gross fiscal deficit is close to 3% of GDP, down from c.5% in 2012. Real GDP growth has averaged around 7.5% YoY since 2014, up from about 6% in previous years.

While the Indian reform programme has not been without setbacks, it is clear that the aim is to deliver long-term benefits by boosting the supply side. The glass of long-term macroeconomic reforms therefore appears to be more than half full, and there is potential for several policy initiatives to create synergies, thereby increasing the likelihood of all succeeding collectively.

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